An Interesting Look At A&B ~ A 141 Year Old Hawaii Business

A&B long the target of takeovers

Alexander & Baldwin Inc. is the last surviving member of the Big Five firms that dominated Hawaii’s economy

By Andrew Gomes
Article from: Star-Advertiser

Alexander & Baldwin Inc. has been in business 141 years, and for most of that time the kamaaina company has stood on three legs, each representing a major industry closely tied to Hawaii — agriculture, shipping and real estate.

The stool has been pretty sturdy, enabling the Honolulu-based company to realize or improve gains from one industry with the help of another, or to rely on different legs to weather downturns in others.

But at times in A&B’s history, influential shareholders have questioned the structure and made attempts to sell off pieces of the publicly owned firm.

Two weeks ago, a new plan to dismantle the stool is suspected of being set in motion by New York hedge fund manager Bill Ackman, who recently bought 10 percent of A&B with an associate to become the company’s largest shareholder.

Ackman hasn’t publicly detailed his intent, but said in a broad statement that he plans to hold discussions with A&B management, directors, other stockholders and other parties “concerning the business, assets, capitalization, financial condition, operations, governance, strategy and future plans” of the company.

A&B has said it is open to hearing Ackman’s ideas, but won’t comment on the subject of discussions.

Stock analysts and other observers familiar with A&B believe Ackman will seek some kind of breakup of the company, which has 2,300 employees.

“A lot of people will look at a company and say the parts are worth more than the whole,” said Bob Sigall, a local business consultant and Hawaii Pacific University marketing professor who produces the book series “The Companies We Keep.”

“From a Hawaii point of view, I’m skeptical, I’m cautious and I’m worried.”

BREAKING UP IS HARD TO DO
Supporters of keeping A&B intact list these reasons:

• Control of Matson, Hawaii’s largest delivery service of goods from the mainland, is best held by a Hawaii company.

• Loss of prime farmland could lead to the shutdown of the state’s last sugar plantation, Hawaiian Commercial & Sugar Co.

• A breakup could reduce or eliminate charitable giving. The A&B Foundation donated $1.3 million last year to Hawaii nonprofit organizations. Since A&B?established the foundation, it has donated more than $18 million to nonprofits mostly in Hawaii.

A giant perceived prize that often inspires wide eyes from shareholders seeking a breakup has been A&B’s 87,840 acres of land in Hawaii largely used for growing sugarcane on Maui and coffee on Kauai.

George Pickral, a research analyst with Arkansas-based financial services firm Stephens Inc., values A&B’s real estate holdings, which include the farmland and developed commercial property, at nearly $2.3 billion.

A&B doesn’t break out the value of its Hawaii real estate. All its assets — including the land, its fleet of Matson Navigation Co. cargo ships, shopping centers and office buildings — are worth about $2.5 billion, according to the company’s 2010 annual report.

A&B lists the average cost for its Hawaii land at $150 per acre, or a relatively minuscule $13 million for nearly 88,000 acres. The company regards most of its Hawaii real estate as having relatively low present value because it is incredibly difficult and time-consuming to convert farmland to higher-value uses such as residential or commercial development under state and county land-use regulations.

The company says it has the best keys to unlock the long-term value of its land while also producing significant annual profit from its interrelated operations.

“Hawaii’s multi-tiered entitlement process can be challenging, at times taking years to move a project from application to approval,” A&B said in the report. “Our ability to navigate this process is one of the company’s core competencies.”

A&B has also been pretty adept at deflecting breakup efforts throughout its history. But the potential for big short-term rewards have led a number of major shareholders to take a crack at splitting the company apart.

Perhaps the most raucous breakup attempt was made in the 1980s by Harry Weinberg, a Hawaii stock speculator who at the time was one of the nation’s 100 wealthiest individuals.

Weinberg bought a 6 percent stake in A&B in 1978, which secured him a seat on the company’s board of directors. The activist investor failed to persuade A&B to sell its real estate or Matson, so he amassed more stock — roughly 25 percent — and asked other shareholders in 1985 to oust directors who didn’t support his plan.

In the fight for control, Weinberg criticized A&B for “squandering” money on sugar production and claiming there was no realistic way to accurately value its Hawaii land holdings that then covered 96,000 acres. “Ask yourself whether management really wants you to know what the land is worth?” Weinberg wrote in his letter to shareholders.

With Weinberg, A&B defended its diversified business model. The company touted its strong annual profit and called Weinberg’s claims about land values unrealistic.

Weinberg lost the shareholder vote by a roughly 60-40 margin. Later, A&B bought back most of Weinberg’s shares for more than $300 million with a caveat that he not influence the company for seven years.

Another contest for a piece of A&B, which proved successful, occurred about a decade earlier when A&B owned most of Maui Pineapple Co.

A group of A&B shareholders related to former Maui Pine general manager Colin C. Cameron helped Cameron win a seat on A&B’s board and pursue a plan to acquire A&B’s 54 percent stake in Maui Pine.

Cameron — whose father, J. Walter Cameron, was once chairman and president of A&B — was elected to A&B’s board in 1968 despite management opposition. A year later, Cameron announced the takeover bid that resulted in his family buying A&B’s stake in Maui Pine and acquiring control of that company and its 28,000 acres on the Valley Isle.

In a more recent case, a Connecticut-based hedge fund manager who once headed the federal Securities and Exchange Commission, Richard Breeden, snapped up about 15 percent of A&B stock in 2008 and made a disclosure about planned discussions with management similar to Ackman’s recent filing.

A&B declined to say whether the former regulator turned activist investor advocated for breaking up A&B. Breeden ended up selling his large stake in the company by 2009, according to reports filed by Breeden.

Some A&B insiders bristle at efforts by outsiders to break up the company, saying that management regularly reviews the idea with help from independent experts. To date, such internal reviews have deemed a breakup not to be in best interest of the company and shareholders.

Critics of the breakup plan say the idea is focused on short-term gains that could have several negative long-term impacts on A&B and the local economy.

A&B has long promoted the idea that control of Matson, Hawaii’s largest delivery service of goods from the Mainland, is best held by a Hawaii company.

Loss of prime farmland could lead to the shutdown of the state’s last sugar plantation, Hawaiian Commercial & Sugar Co., which has struggled financially over the past few years as A&B tries to find a way to possibly convert the operation to crop-based production of renewable energy.

A breakup also could reduce or eliminate charitable giving. The A&B Foundation donated $1.3 million last year to Hawaii nonprofit organizations along with $300,000 to mainland organizations. Since A&B established the foundation, it has donated more than $18 million to nonprofits mostly in Hawaii.

Another impact could be the end of what some consider Hawaii’s only remaining company of the Big Five, which dominated commerce when the economy of the islands was driven by agriculture.

A&B was the youngest of the Big Five. In just the past few decades, three of the four others — Amfac, C. Brewer & Co. and TheoDavies — were sold or liquidated and are no longer active. The fourth, Castle & Cooke, was acquired by billionaire David Murdock, who moved the company’s headquarters to California and changed its name to Dole Food Co. before spinning off its homebuilding division under the old name.

“I’d hate to see the last of the Big Five lost to Hawaii in some way,” said Sigall, the consultant and professor. “I think it would be a tragedy.”

A&B was established in 1870 by Samuel Alexander and Henry Baldwin, sons of missionaries who started a partnership growing 12 acres of sugarcane on Maui.

For much of its life, A&B concentrated on agriculture, as it expanded interests to sugar plantations on Kauai, the Big Island and Oahu. But A&B also was quick to begin diversifying.

In 1908, the company invested $200,000 for minority ownership in an upstart California-based shipping line started by William Matson. Close to 50 years later, A&B along with Amfac, C. Brewer and Castle & Cooke had acquired stakes in Matson that amounted to 74 percent.

In 1964, A&B bought out its big partners, and Matson became A&B’s largest operating asset, overtaking agribusiness, which later went into steep decline as sugar plantations closed. In 1969, A&B acquired the rest of Matson to make it a wholly owned subsidiary.

Meanwhile, real estate development had become a focus as A&B aimed to provide modern housing and commercial centers for plantation workers. A&B formed Kahului Development Co. in 1949 with the idea to build a “Dream City.” The first Kahului home was sold in 1950, and over the next few decades A&B expanded its real estate division with developments of retail, industrial, office and resort projects mainly on Maui.

A&B hasn’t been totally averse to selling significant pieces of its business, but has always maintained the foundation of its three legs.

In 1967, A&B sold its large insurance division. In 1989, A&B sold Wailea Resort, and a year later sold Maui Lani, a planned community for which A&B had obtained development approvals. The proceeds from the real estate sales were invested in developed mainland commercial property.

Most recently, A&B sold its Kauai Coffee Co. subsidiary last month to an Italian firm, though A&B retained ownership of the 3,000 acres under the farm.

Last year, transportation and real estate dominated A&B’s financial returns. The company reported that 54 percent of its $198 million operating profit came from transportation, 43 percent came from real estate and 3 percent came from agribusiness.

In its 2010 letter to shareholders, the company said: “We believe that A&B has never been better positioned to create value from its greatest assets: our Hawaii land and local knowledge, and Matson’s brand and expertise.”